I'm not going to get into the details of Pratt's argument or Goldberg's counter-argument (you should definitely take the time to read both). I was struck, however, by Goldberg's assertion that the "real reason" SIBs are here to stay is because "Government is out of money and out of breath" (a phrase he credits to Sir Ronald Cohen, a "founding father of social investing"). Goldberg continues:

We are enmeshed in a long-term fiscal and economic crisis that will increase the need, but decrease the funding, for effective social services long after unemployment returns to normal levels. This is a "new normal" of government retrenchment, rising inequality and decreasing social mobility to which we have not yet adjusted. The safety net ain't what it used to be, plus we can’t afford it.

While there are many encouraging trends in social sector innovation, as well as room for improvement, beleaguered nonprofits are in no position to take up the slack left by an eroding public sector. They don't just, as Mr. Pratt puts it, "frequently feel under-compensated, need more resources, and blame their limited success on lack of funding," they are under-compensated, in need of more resources and held back by a chronic and worsening lack of funding. Nonprofits are fighting a holding action that they can't win over the long term. They, too, haven't figured out how to cope with the new normal....

Now, Steve Goldberg isn't the first person to make this argument, and he won't be the last. But if denial is a river in Egypt, then many nonprofits are ill prepared for what's coming.

What do you think? Was the Great Recession merely a prelude to a "new normal" characterized by government retrenchment, reduced funding, and lowered expectations? Are most nonprofits prepared for such a reality? Will SIBs gain traction as more traditional funding sources dry up? And what do you think the sector will look like a decade from now? Use the comments section to share your thoughts....

Interested in learning more about the pay-for-success model? As part of its social innovation work, McKinsey has put together a nice package of resources, including the 2012 report From Potential to Action: Bringing Social Impact Bonds to the U.S., an animated video that introduces the topic of SIBs, and an introductory article that describes the SIBs landscape. Well worth checking out...